U.S. firm is specialized in bottom-up analysis of domestic stocks and bonds, firm’s client base is equally split between U.S. based defined benefit pension plans and 401(k) defined contribution plans. Portfolios are allocated between domestic stock and domestic fixed income.
Discuss whether it is more appropriate to hedge currency exposure for international bonds or equity assets.
Solution: For bonds, because bonds are the less volatile asset class, so the volatility of the foreign currency is proportionately more significant to the foreign investor in a country’s bond market.
Can someone explain why? I would have gone for equity…